Microeconomics Unit 6 - Market Failures

Moral Hazard Problem

A moral hazard is a situation where a person or business will have a tendency to take risks or alter their behavior because the negative costs or consequences that could result will not be felt by the person taking the risk. Simply stated, the financial cost or consequence will be felt by someone else.

Non Rivalry Goods

A non-rival good is one that can be used or consumed by one person without reducing the amount left for others. In other words, a nonrival good can be used again and again at almost no additional cost.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well.

Rivalry Goods

A type of good that may only be possessed or consumed by a single user. Using a rival good prevents its use by other possible users. Rival goods can be durable, where users may use them one at a time, or nondurable, where consumption destroys the good, allowing only one user to enjoy it.

Supply of public good

Determined by MSC

Marginal Social Benefit (MSB)

Determined by the citizen's willingness to pay.

Excludability

In economics, a good or service is called excludable if it is possible to prevent people (consumers) who have not paid for it from having access to it. By comparison, a good or service is non-excludable if non-paying consumers cannot be prevented from accessing it.

Non Excludability

In its purest form, non-excludability means that once a good has been created, it is impossible to prevent other people from gaining access to it (or more realistically, is extremely costly to do so).

Demand for Public Good

Is determined by the MSB.

Marginal Social Cost

The cost of providing each additional quantity.

Private Good

an item that yields positive benefits to people that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits;[2] and rivalrous, i.e. consumption by one necessarily prevents that of another

Free Rider Problem

free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.

Public Good

is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others

Spillover costs

is a term used to describe some loss or damage that a market transaction causes a third party. The third party ends up paying for the transaction in some way, even though it was neither the buyer nor the seller and had no part in the original decision.

Externalities

is the cost or benefit that affects a party who did not choose to incur that cost or benefit.

Example of Negative Externality

Negative externalities are costs that third parties has to bear when a good is consumed or produced. Example of an externality that results from consumption is road congestion, and that from production is pollution. When society consume the "usage of roads", it will come to a point beyond which additional road user (driver) will cause third parties to incur some costs as the road started to get congested. When this happens, the employers of these drivers will suffer productivity loss due to them coming in late. When firms engage in the production of goods in their manufacturing plants, hazardous gases may be released into the atmosphere, thus leaving the society having to bear the brunt of additional medical costs.

Example of Positive Externality

Positive externality is defined as benefits that accrue to a third parties not involved in an economic activity. These benefits can be passed on due to either the consumption or production of a commodity by society. Example of a positive externality that is derived from consumption is Education, and that from production is R&D. When society receives better education, this in turn will benefit the country as a whole as more foreign direct investments will flow into the country, thus increasing employment and income. When a company engages in R&D, the discovery of new production technology can be adopted by other firms in the industry.

Adverse Selection Problem

a term used in economics, insurance, risk management, and statistics. It refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the "bad" products or services are more likely to be selected. For example, a bank that sets one price for all of its checking account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Two ways to model adverse selection are to employ signaling games and screening games.